Credit and collections during Covid-19

How credit and collections can find the balance between customer and company needs during the Covid-19 crisis

Businesses and individuals across the world have been impacted by the Covid-19 pandemic and lockdown measures implemented to attempt to control the spread of the virus. It is having economic consequences on scale that has never been seen before, and with no end currently in sight. It is not surprising that, in these unusual times, businesses have been wrestling with what how to manage their credit and collections during Covid-19. Should it be put it on hold to post-crisis with customers offered extended credit terms, understanding that they might be struggling with cash flow themselves at present or should it be business as usual?

It is impossible to recommend a one-size fits all strategy for credit and collections during Covid-19 as how every businesses has been affected will be different and will need to consider this within their strategies. For some it has been a period of boom – online retail, electronics, home entertainment and takeaway services have seen an unprecedented rise in demand. For others, bust; with high street retail, hospitality, travel and tourism and other non “key” businesses really feeling the impact of the ongoing lockdown measures.

Indeed, each business’ financial position will be unique depending on access to working capital, ability to maintain business continuity and potential for market adaption. Outlined below are 6 key considerations that will ensure you build a credit and collections strategy during Covid-19 that meets the needs of your individual business, whilst balancing those all important customer relationships.

1. Current cash flow forecast

Before you consider any alternations to your credit and collections strategy you need to understand your company’s current financial position, as well as the potential impact of COVID-19 on your future cash flow. If your business is impacted by the current lockdown measures, with minimal or no trading, it might not be an option but to chase your overdue payments if you wish to remain liquid. Equally, if you have only been marginally affected, it will take time to recapture lost revenues, and chasing your debtors to keep cash moving might be critical to maintaining the long-term financial health of your business. 

2. Individual customers will need individual strategies

Whether you can afford to allow more lenient credit terms or need your money in the bank, it is critical to look at each customer on a case by case basis and not move to a blanket strategy.  Some customers will be perfectly able to pay, some may require a little breathing room, whilst some will always look to exploit the situation to their own advantage and keep their money in the bank a little longer.  Review your customer base and estimate how they might be impacted by the current crisis. Do they come from disparate sectors so you will be managing a mix of levels of financial impact or are they all going to be the same? Considering this upfront will allow you to develop a collection strategy based on your customers ability to pay – increasing the efficiency of your activity. You may just have to chase everyone equally, but this could highlight the customers you can push and the customer you can offer more sympathetic credit terms.

3. Leverage your credit team’s knowledge base

When developing your strategy, ensure you talk to your in-house team or outsource partner – they will be having on-going conversations with your customers and will have an understanding of where the pain points are and where there is opportunity to collect. They are also going to have to implement any strategy, so ensuring their buy in will be critical to its’ success. 

4. Communicate with your customers

Whilst reviewing your customers gives you assumptions, talking to your customers gives you insights. If a traditionally great customer suddenly defaults on a payment, this could be a sign that something is amiss, and they need support. On the other hand, if a customer always needs chasing and hasn’t paid yet, they might just be waiting for their monthly push. 

It is important to remember that any contact with your customer, even cash collection, is a marketing opportunity in which you can influence their perception of your business and brand. A proactive, resolution focused approach, such as placing any current orders on hold to minimize their on-going exposure to debt, offering extended credit terms or repayment plans or even a special discount for conversion to direct debit payments with existing credit spread over future debits could turn a customers into an advocate and ensure their future loyalty.

5. How and when will outstanding monies be paid?

The CICM have already issued a warning over the potential risks of providing of business payment holidays, highlighting how “a third (34%) of credit managers have been asked to renegotiate or ditch existing credit terms”. Sue Chapple, Interim Chief Executive of the CICM, called them “a stay of execution” merely delaying a business’ inevitable collapse – whilst you could be continuing to provide them with further goods or services for which you will struggle to recoup the cash.

“a third (34%) of credit managers have been asked to renegotiate or ditch existing credit terms”

Sue Chapple, Interim Chief Executive of the CICM

We all need to be sympathetic to the fact that some clients will currently be struggling financially and how we work with them through this short-term crisis will secure their loyalty in the long-term. However, at some-point outstanding debts will need to be paid and pushing everything into the distant, uncertain, future will neither help you or your customers manage your cash flow.  When considering extending customer credit terms, a repayment plan might be a better option to ensure you can both recoup your cash and offer your customers some level of support.

6. Impact of inactivity

Any Head of Credit and Collections, Credit Manager and Credit Controller knows that the key to effective collections is customer contact. Whether it be email reminders, old fashioned “Dunnings” letters or a quick call to chase – activity drives results. We all want an excuse to hold onto our cash, particularly in an uncertain economic climate, so that quick reminder, call that identifies and resolves any invoice issues prior to due date, and little push to ensure your invoice is at the top of the queue, are critical to keep cash flow moving. Even if you choose in the short-term not to ask, other creditors might not be so considerate, and you do not want your invoice to be at the bottom of the creditor queue, particularly if a business is financially struggling. 

Conclusion

Crises such as the COVID-19 pandemic provide an opportunity to go that extra mile for our customers, do the decent thing and subsequently build long-term relationships and loyalty. 

However, this should not be at the cost of the financial security of your own business. Credit and Collections has always had to find that delicate balance between company and customer needs – and that balance has never before been so complex as within the current crisis. Traditional measure of risk versus opportunity are null and void, and it is only through communication with our customers and proactive credit management that the business will maintain its cash flow and its customers.